North Carolina Pension Fund Sure Misses Harlan Boyles

Last week North Carolina State Treasurer Janet Cowell posted the Government Investment Operations Report for the North Carolina Retirement System Pension Fund for the fiscal year ending June 30, 2016.  The report says the treasurer spent $595 Million managing the $87 Billion pension fund investment portfolio.  That's up from just $57 Million when the pension was $59 Billion when Harlan Boyles retired in 2000.

	NC Retirement System Pension Fund
			2000	2008	2016
			Harlan	Richard	Janet
			Boyles	Moore	Cowell
	Expense Ratio		0.1%	0.3%	0.7%
	Funding Ratio		113%	105%	96%
	S&P 500 Return*		21%	2%	15%
	Sources:	State Treasurer's Annual Reports
		Government Investment Operation Reports
		Investment Performance Reports
		Retirement Systems Valuation Report (10/15)
	*	7-year Annualized Return

While the pension fund assets have increased 47% since Harlan Boyles retired, the expenses incurred managing the investments have increased an astonishing 1,044% while the funding ratio has fallen 17 points.  This irresponsible explosion of investment expenses is a boon for Wall Street, but a silent fiscal catastrophe for North Carolina, the burden of which will be borne by the pensioners and taxpayers for years to come. 

Index Fund Returns Crush North Carolina Pension Returns (Again)

North Carolina Treasurer Janet Cowell recently released investment returns for the state pension fund.  The press release touted the returns as being slightly better than average over the past 5 years (45th percentile).  However, it is important to keep in mind that the NC pension fund fails to beat a simple mix of low-cost Vanguard index funds.

The table below shows the annualized returns of the NC pension fund compared to a simple portfolio of 5 Vanguard index mutual funds.

Annualized Investment Returns
as of 6/30/2016
	North	Vanguard
	Carolina	Index	Lost
	Pension	Funds*	Returns
1-Year	0.8%	5.4%	4.6%
3-Year	6.1%	8.0%	1.9%
5-Year	6.0%	9.1%	3.1%
7-Year	8.5%	11.2%	2.7%
10-Year	5.5%	7.3%	1.8%

*The Vanguard portfolio uses the same asset allocation the pension fund had when Harlan Boyles left office in 2000, before alternative investments were introduced to the portfolio. The analysis rebalanced the allocation of the Vanguard portfolio once per year.

Treasurer Cowell pointed out that the pension earned 8.5% annualized over the last 7 years - which approximates her tenure as North Carolina's Treasurer.  The simple Vanguard portfolio would have earned 11.2% over the same time period.  This difference of 2.7% per year for 7 years translates into $20 billion of lost returns during Treasurer Cowell's tenure.

For a state whose annual budget is $22 billion, the expansion of alternative investments in the pension fund from nearly zero to over 25% has been a silent fiscal catastrophe.